28 Feb 14 Reforms in the power sector – A good sign for the switchgear and control gear market

“The Indian electrical equipment industry has shown some revival in the first half of the current fiscal, after a negative growth of 7.8% in production in 2012-13. Domestic demand, coupled with increase in exports, has managed to keep the industry afloat.”

– Mr. Raj Eswaran, President, IEEMA

After a period of weak growth in the electrical equipment industry on account of delays in project execution, high import growth and depreciating rupee, I can finally see some light at the end of the tunnel for the electrical equipment industry. Progress in power transmission and distribution sector, reforms like the “Restructured Accelerated Power Development and Reform Program (R-APDRP)” and demand from the expanding sectors like infrastructure and real estate have provided a boost to the electrical equipment industry. With government’s aggressive expansion plans and restructuring and modernization of the T&D sector, we can finally see some ‘power shifting’ to the distribution segment.

These reforms will be good news not only for the companies servicing the distribution sub segment but also the electrical equipment manufacturers in the country as a steady increase in demand for products like switchgear, control gear, transmission lines etc. is expected once all these reforms come through.

Factors affecting the growth…

Based on my research, a few of the policies and reforms that have been implemented and others that are going to be implemented by the government in the Indian power sector will work in favor of switchgear and control gear manufacturers in the country, as shown in the table below.

Figure: Reforms/Policies as announced by the Indian Government

Factors

Description

Imposition of import duty

To curb the growth of cheap low quality imports of electrical equipment from countries like China, Indian government has imposed an import duty of 21% on the power equipment.

Financial restructuring of the distribution companies

The new budget in 2013 made an allowance for the financial restructuring of the distribution companies where it has provision for not only the restructuring of loans but also for incentives for state governments to cut the current distribution losses. There is also an elaborate legislative back up, in the form of the State Electricity Distribution responsibility Bill, to ensure that errant distribution companies fall in line and high-level committees to monitor progress of these distribution companies

High Voltage technology

Power transmission network in India which currently operates on 220KV and 400KV is expected to step up to a higher range of 765KV and high voltage direct current

Growth of low quality imports from countries like China, especially in the low voltage segment of the switchgear market, has been one of the biggest challenges that the switchgear and control industry faced in the past couple of years. With the imposition of the import duty on power equipment announced recently by the government, the domestic manufacturers of low voltage switchgears in the country have got a much needed support to boost their sales. Although associations like Indian Electrical & Electronics Manufacturers’ Association (IEEMA) and bigger manufacturers are not very happy with the current arrangements, I feel that it’s a good start at least.

Domestic manufacturers like Bharat Heavy Electricals Ltd (BHEL) and Larsen and Toubro (L&T) can benefit a lot from these duties on imports of electrical equipment. Additionally, if financial restructuring of distribution companies as planned by the budget is successful, it will ensure that the reforms, planned investment and capacity addition will come about as per the plan.

Last but not the least, shift to high voltage technology by the transmission sector in the country is expected to create modest demand for the high voltage switchgear in the country. Since the high voltage market is mostly organized, the segment’s growth will also increase the share of organized segment in the domestic switchgear market.

In conclusion…

According to ValueNotes latest research report “Switchgear and Control Gear Industry in India – 2013-17“, reforms like import duties and financial restructuring of the dis-coms is expected to benefit the electrical equipment manufacturers. This in turn will boost the switchgear and control gear market in the country which is anticipated to witness growth of CAGR ~12% between 2013 and 2017.

Some manufacturers, such as L&T and BHEL who are the market leaders in the domestic switchgear and control gear industry, are already benefiting from these reforms while many mid and smaller players claim they are yet to reap its benefits. In the long run, we anticipate that the reforms and policies will definitely boost the switchgears and control gear industry in India.